Another bank bailout in the European Union

With reference to E.U. Commission Approves Billions in Aid for 2 Italian Banks by Jack Ewing on 25 June 2017 in the New York Times.

On Sunday, the European Commission took quick action when two small Italian banks, Banca Popolare di Vicenze and Veneto Banca, were heading towards bankruptcy. To avoid Italian residents losing confidence in the banking system the E.U. allowed the Italian government to bailout the two banks for billions.

The plan is 4.8 billion euros in cash and 12 billion in guarantees of depositors. The two banks only account for 2 percent of Italian deposits.

The reason to go this route is because the majority of the Italian banks are consisted of problem loans and very little capital. Fear if these two banks fail it will cause a panic. Italians might lose faith in the banking system and could cause people to withdraw their money and banks will shut down.

The investors of this bank in senior bonds will keep their investment, however, junior bond investors will lose theirs as well as shareholders.

Despite this large …

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The 3 tools in a bankers box.

Banks have three tools (and no, it isn’t the CEO, Chairperson and Secretary!) in their box for getting into good health:

1. Operational efficiency: translation – fire a lot of people, close branches, reduce company benefit schemes etc 2. Reduce deposit pricing: pay the people who deposit with you less 3. Increase margins: on mortgages, SME loans, and every manner of service for which you can get away with it.

Which is why the news that AIB want to increase prices comes as no surprise. The first two parts of the plan are already under way, they are closing nearly 70 branches of which 44 just shut two weeks ago. They are getting rid of 2,500 staff members, that’s the ‘operational efficiency’ leg of the journey.

The deposit pricing is lower now than it was last year and last year was lower than the previous year, currently they’ll pay 2% or less for any account with a meaningful amount (greater than €50,000). While they market attractive rates for the regular saver (above a certain amount you’ll often go to a …

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Will Specialist or Sub-Prime lenders be better off?

With the news coming out daily about prime lenders facing higher and higher impairment charges it begs the question of who will do better during a downturn, specialist/sub prime lenders or prime high street banks?

Banks stated that they feel impairments of up to 90 basis points were likely, some have revised this figure higher several times with NIB predicting impairment of upwards of 300 basis points. Sub-prime lenders on the other hand start off with predictions of high impairment and they price and gauge the risk accordingly from the outset. Given that starting point, could it be a case that Irish specialist lenders may come out the other side of the liquidity crisis with an overall book that fares proportionately on margins than other prime lenders?

To answer this question we must first consider margins, with many banks typical margin is from 1% to 1.5% on average, however, with many prime lenders this margin is  lower because of low margin trackers that were a point of heavy competition between …

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